Flat-Living.co.uk Workshop CALCULATING THE PREMIUM


In its simplest form, a lease extension premium is calculated as follows:


Landlord’s loss (A) plus 50% share of any profit (marriage value) (B), so A + B = the premium.


OR, PUT ANOTHER WAY:


A = Landlord’s interest in the flat before (v) less Landlord’s interest in the flat after (w) So: (v-w) = landlord’s loss (A) PLUS An equal share of the difference between:


The total of both the landlord and tenant’s interests in the flat after the extension (x) COMPARED WITH:


The total of both the landlord an tenant’s interests in the flat before the extension (y) So: Marriage value = (x-y) This is shared equally (50%) = B So: A + B = the premium to be paid.


A BRIEF HISTORY


From 2006 until recently, due to the Sportelli cases, regardless of the view professionals have taken of that decision, its outcome narrowed disagreement as it effectively fixed the (deferment) rate used by surveyors to calculate the value of a landlord’s interest. That rate (used to work out the present value to the landlord receiving the flat back at the end of the lease) was basically fixed at 5%. This year there have been some successful challenges to this rate,


at both the Upper Tribunal (formerly Lands) and LVT. The outcome being an upward adjustment in that fixed rate to 6%, particularly outside of London. Conversely, since these successful challenges, the central London


Estates have started to quote at 4%. (This is not new, but, before 2006, whilst they may have been quoting below 5%, depending on the Estate involved there were settlements achieved at rates from 5.25% to 7%): The higher the rate, the lower the premium.


FOR EXAMPLE:


Landlord’s Valuation at £1,000,000


65 year lease 65 year lease 65 year lease 155 year lease 155 year lease 155 year lease


Deferment rate


4% 5% 6% 4% 5% 6%


Present Value


£78,133 £41,946 £22,653 £1,547 £319 £67


(v) (v) (v)


(w) (w) (w)


The range created for the landlord’s loss (v-w) in the landlord’s view is therefore £22,586 to £76,586 depending on the rate used. This is part (A) in our simple premium calculation.


Landlord’s Valuation at £850,000


65 year lease 65 year lease 65 year lease 155 year lease 155 year lease 155 year lease


Deferment rate


4% 5% 6% 4% 5% 6%


Present Value


£66,413 £35,655 £19,255 £1,315 £271 £57


(v) (v) (v)


(w) (w) (w)


The range created for the landlord’s loss (v-w) in the tenant’s view is £19,198 to £65,098. It should be noted that as the marriage value calculation compares


both parties interests “before” and “after” and then splits the profit equally, some of the increase “before”, some of this is “halved-back” or reduced, but not all.


Quoting premiums


Landlord’s View Tenant’s (at 4%)


A - Calculation of loss: Landlord’s interest before £78,133 Landlord’s interest after Loss (v-w = A)


B – Calculation of share of marriage value


Sum of: Landlord after Tenant after


Compared with Sum of: Landlord before Tenant before


Marriage value (x-y) B = 50% of (x-y)


Premium = A + B £1,547 £990,000


£78,133 £825,000


£88,414 £44,207


£120,793


£841,500 £841,500


£19,255 £743,750


£78,552 £39,276


£58,474


The effect on the quoting premiums is startling as illustrated below. The premium range created is £58,474 to £120,793: a 107% difference!


So was Sportelli welcome and will it be missed? The outcome of Sportelli whether right or wrong, did have some use.


Up until recently, with that effectively fixed deferment rate of 5%, there was a degree of certainty as to the premium. Introducing a 5% deferment rate to the figures above, for a start


narrows the difference between the parties in our illustration above to £66,566 to £103,313. Still a large range, but now only 55% difference. That difference would have been narrowed considerably during


negotiations, with the reality that the expectations of the parties when considering relativity more likely to be 84%-86%, as opposed to the 82.5% to 87.5% used in our example. As such, the re-opening of the argument on deferment rates, as


opposed to the relative calm that has existed to some extent over the preceding 4-5 years means there might be interesting times ahead. For the more common cases, I firmly believe that the “commerciality” of a situation will mean that sensible settlements will still be achieved, but this is a complex field where proper advice is essential.


www.flat-living.co.uk 47


-£1,547 £76,586


£19,255 -£57


£19,198 View (at 6%)


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